Real Estate

Inherit the home and the headache

Inheriting a home from someone is always a great privilege, but it is worth checking the details of the will to avoid unpleasant surprises down the road.

Photograph by: Thinkstock
, National Post

Inheriting a home from someone is always a great privilege, but it is worth checking the details of the will to avoid unpleasant surprises down the road.

If the home still has an outstanding mortgage or lien attached to it, whether or not you are on the hook for the debt depends on how the estate has been arranged.

"If you die and you own property, the estate becomes the owner - the estate then distributes the property," says Ray Leclair, real estate lawyer and vice-president of Title Plus at Law Pro in Toronto. "Typically, distribution is done debt-free. The first obligation of an estate trustee is to pay the debt, once the debts are paid then you distribute what is left."

Provided that the estate has the funds to pay off any outstanding mortgage, you will inherit the home debt-free.

"The wrinkle to that is if I say in my will 'I want my house at this address to go to my daughter,' then the executor has to distribute that property," Mr. Leclair says. "The question then becomes whether or not it is debt-free."

Mr. Leclair says the person leaving the property should consult an estate lawyer in order to make sure that, when leaving their home, they don't also leave a financial headache for their beneficiary.

"The beneficiary doesn't have to assume the mortgagedebt obligation. You can say 'No, I don't want the mortgage.' But, you don't have a choice of taking half of the gift," Mr. Leclair says. "You either take the house with the mortgage or you don't take the house."

Mr. Leclair says to check with the lender, as not all will simply allow you to take over the deceased's mortgage.

"A credit protection plan is part of your bigger financial plan, not just around your mortgage," says Farhaneh Haque, director of mortgage advice at TD Canada Trust. "The credit protection allows you to have insurance on your mortgage. As you pay down your mortgage, in case you suffer critical illness or on your passing, the mortgage outstanding balance is paid off."

An insurance professional can help you decide if you just need insurance for the mortgage debt or more general life coverage.

"If you get the property, but you find out there's an old mortgage on it that the deceased never knew about, you're the owner of the property and you just inherited the problem," Mr. Leclair says.

Title insurance could help protect from such a claim on your recently acquired property.

"Title insurance automatically transfers to the heir," Mr. Leclair says. "If they are an heir who inherited the property, they step in the shoes of the deceased in the title insurance policy. They put a claim in and then the title insurer has an obligation to defend the title, which may be to remove the old mortgage or the old lien or take necessary steps at that point to deal with it."

Mr. Leclair says it is possible to take out an existing owners' title insurance policy, but you will not receive such extensive coverage as you would from an inherited policy.

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